By Holti Banka
Electronic transactions are generally defined as any technology based transactions which do not include the use of cash and other paper based payment instruments. Given the current financial environment in Albania and its potential, this definition could be narrowed to payment instruments such as debit/credit cards, pre-paid cards, and transactions based on internet banking and mobile phone banking.
In Albania, cash is still the predominant mean of transactions in all spheres. According to the latest annual report from the Bank of Albania, cash and check payments accounted for 97.5% of all local currency payments in 2011. In other words, this corresponds to only 4 electronic payments per capita. This number is quite revealing because it is an indication that e-payments are almost nonexistent in Albania. This situation should, therefore, raise a red flag for an EU candidate to be, given that the average share of e-payments accounts for more than 50% of all payments in the EU. It’s time for the Albanian society to make a serious effort towards the dissemination of e-payments as significant benefits are attached to them. Empirical studies have shown that countries can save as much as 5% of their GDP (around $670 million in Albania’s case) if they transition to e-payments. An e-payment system is not only more cost efficient but it also provides transparency and a strong monitoring mechanism for tax purposes
From a historical perspective, Albania has never enjoyed a comprehensive and consolidated payment system during its 20 years of democracy and free market environment. There has always been a deep-rooted notion that because cash is “tangible”, it offers a sense of security, which is not the case. The collapse of the so-called “pyramid schemes” in 1997 shook the trust of Albanians in the banking system and left them with a bitter taste. Since then, banks have had a negative connotation in Albanians’ minds. Today, 16 commercial banks operate in the country, with 14 of them being foreign owned and offering a variety of financial products. However, the introduction of the new financial products by those institutions, including debit and credit cards, was made rather abruptly in Albania.
In other Balkan countries that use e-payments, the transition away from cash had as a first stage the use of checks, giving people time to digest the new technologies, before opting for electronic cards. Moreover, one would think that the operation of foreign commercial banks would be considered as a safe guard for the stability and security of the financial system in the eyes of Albanians, given that these institutions oblige to international standards. Yet, the trust of the Albanians towards banks is yet to be recovered, given that the deposit increase rate in Albania is the slowest in the region of Balkans, as evidence from the World Bank shows.
It is hard to establish an effective e-payment system without trust in banks, as consumer deposits are a necessary ingredient for such a system to operate. The government has tried to reverse this pattern as since 2003, the Albanian public employees that work for the central government have been paid their salaries through direct deposit to their checking bank accounts. This is a strong incentive for people to open bank accounts and a first step towards the use of e-payment instruments, because such accounts come automatically with a free debit card. The debit card has three main uses: purchases from a POS (point of sale with installed card readers), purchases through the internet, and ATM withdrawal. While the first two uses are not widely pursued in Albania, the third practice can serve as a way for Albanians to familiarize themselves with debit cards and feel safer and more comfortable using them. This practice would prepare the ground for the next step in the process which is using cards in stores. Yet, for this idea to work, banks need to install more off-site ATMs (ATMs that are not located within or nearby the banks) throughout the country while encourage customers to make frequent use of them.
The real question is if Albanians really utilize their bank accounts and the e-payment instruments that come with them. Evidence shows they don’t. In fact, it is common seeing employees line up in front of counters in bank branches in order to withdraw their entire salaries from their “salary” accounts. Part of it is the fact that salaries are low in Albania. Yet, those “salary” accounts can still be utilized, even by the low income Albanians. For instance, the accounts can be used to receive remittances and pay utility bills. The Albanian migrants in Greece and Italy send remittances primarily in cash to their families back in Albania regularly (almost every household in Albania is a recipient of remittances), using money transfer operators. Many people are not aware, though, that sending remittances through money operators is expensive as progressive fees apply, contrary to using electronic remittances through banks, where a flat fee applies usually. Similarly, Albanian families can pay utility bills (electricity, water, phone, etc) through their bank accounts, using the so-called direct debit service (which is free) rather than show up in person to make such payments.
It is the responsibility of banks to inform customers in a simplified language about the different services they offer which facilitate e-payments, but the most important thing is making clear that the use of debit cards has no cost for them (the credit card case is more complicated). On the contrary, using cash has high costs such as the risk of being robbed, existence of counterfeit notes, and time costs for waiting in lines to withdraw or pay in cash. The government can also assist in this process by organizing informational campaigns on e-payment literacy and educational sessions at universities.
Even if the Albanian society, though, reaches a point where consumers are willing to use electronic cards to make purchases in stores, the stores need to also accept such payment instruments for the process to work. Hence, this becomes a two-fold issue which has to be tackled at both levels (consumer and business) simultaneously. The current situation reveals that in very few instances stores accept cards in Albania; the main places being mainly trade centers and malls in Tirana and major touristy destinations such as Durres and Vlore.
Indeed, businesses operate entirely in cash in Albania, which facilitates the tax evasion phenomenon. According to the latest “Payment Systems Worldwide” report by the World Bank, Albania is ranked at a low medium level of retail e-payment systems, in the same group with countries such as Sudan and Zimbabwe. Adding to this, the informal economy is a major issue in the country. Interestingly enough, even licensed businesses that operate within the formal market still under-report their revenues; this is possible due to cash transactions, which are hard to track. Experience from other countries shows that even the installment of receipt issuing machines would not be sufficient for fighting tax evasion, as authorities would still have a hard time monitoring transactions. Restructuring the tax system in Albania, in combination with a wide use of e-payments in the stores could potentially reduce tax evasion at the business level.
But, how can Albania realize a scenario where all size businesses are willing to accept electronic cards? A good lesson comes from Mexico, which under the “FIMPE” project, managed to increase the use of e-payments in stores by almost 170% in 2003-2006, starting from the same point where Albania stands today. The project was the outcome of a joint effort of the Mexican government and 15 financial institutions. They used incentives such as the government buying the card processing machines for the stores, and organizing informational campaigns in order to create a universal electronic transaction network that would achieve an easier tax collection process and convenience for customers.
Similarly, in Bulgaria, banks and payment providers have joined forces to improve the penetration of e-payments in the recent years. Other practices include incentives such as the provision of tax breaks to businesses that accept e-payments, in order to recover some of the costs they bear for processing e-payments. Indeed, businesses need to pay a fee of 1-2% of the transaction value to banks for each e-payment they accept, and this is another reason why businesses are hesitant to install card readers. However, the cost of accepting cash payments is even higher as businesses have to process cash, transport it to the banks and pay for its security. It’s just that in the case of cash most of the costs are hidden, and as such, are incorrectly underestimated or considered nonexistent.
Ultimately, though, the Albanian government is the actor with a leading role in this process, along with the Bank of Albania. While the direct deposit practice for public employee salaries is a significant step, it is not sufficient. Pensions and social assistance payments are still made in cash in Albania (which is quite expensive to administer), and they need to also be converted to e-payments, while this experience needs to be shared with municipalities and private businesses. For instance, Romania sets a good example as it recently introduced a system for face-to-face and online acceptance of card payments, with close to 180 municipalities participating. In April 2011, it also launched a national tax payέent online system, with all municipalities mandated to enroll within two years to accept card payments.
In addition to learning from other country experiences, it is crucial for the Albanian government to set up a comprehensive e-payment system for the flow of funds within government agencies. An e-payment platform could be one additional weapon, among others, to fight corruption, bribery and embezzlement at the government level, as a better monitoring and tracking system is established.
Alongside the Albanian government, the Bank of Albania needs to be more proactive in the process, as well. Specifically, the Bank needs to work towards restructuring the regulatory framework and align it with EU standards, so that it allows for an easier introduction of new e-payment instruments and the engagement of mobile phone companies in the payment market. Printing and processing cash is expensive, and as such, the reduction of cash in circulation should be one of the main goals for the Bank of Albania. This will come only with an increase in e-payments. In general, a developed infrastructure of e-payments can be beneficial for the economy as a whole because it can attract more investors, as well as more tourists.
At this point, an immediate step that can be taken in Albania is the creation of an independent agency or task-force from the government, in collaboration with the Bank of Albania in order to design a comprehensive e-payment platform. Obviously, this process requires the involvement, to some extent, of all other interested parties such as businesses, commercial banks, card companies, mobile phone carriers, as well as the consumer protection agency, and civil society. A discussion through regular open conferences is the first step in order to disseminate information and knowledge to the wider public on e-payments, which can hopefully ignite tangible action.
While Albania is in its first steps of this transformative process and it looks like the e-payment reality is far, the Albanians have shown that they get used to new practices quickly. One can be hopeful by looking at countries such as Kenya and Tanzania (with a less advanced financial infrastructure than Albania) which established innovative electronic transactions (such as mobile phone payments) in a short period of time, just because there was serious engagement from both the government and the private sector. All there needs to be is coordination and a serious debate in Albania about the benefits of e-payments, which will eventually lead to the actual transformation in practice.
Holti Banka is a Doctoral candidate at the School of Public Policy, University of Maryland, College Park in the United States. He specializes in international development and payment systems.
